Is an FHA loan right for you?
While choices for loan products have narrowed considerably the last few years one program has proven useful for many borrowers, and that is FHA (or the Federal Housing Adminsitration).
These loans were initially designed for homebuyers of modest means with little down payment, they are increasingly being used by borrowers for their higher than average debt to income ratios.
There are a few key features that either make or break the suitability of it for a specific borrowers transaction.
The key feature here is that the borrower is only required to put about 3.5% down (or $3,500 per hundred thousand dollars of purchase price.
The first thing we ask a borrower is the property type he wants to finance, it is very difficult to get a FHA loan on a condo in Eagle County as the entire condo project must be approved by FHA. This is a costly and time consuming process and is not worth it for a single loan in a condominium community. There are only about 2-3 FHA approved projects in Eagle and Summit Counties
The second feature of an FHA loan is the mortgage insurance (MI). There are two MI fees; the first is a one time one percent of the loan amount called an up front mortgage insurance premium. The second fee is a monthly charge for the life of the loan and generally it works out to be .90% of the loan amount divided by 12. So on a $100,000 loan one would have a monthly MI premium of $75.00 and a upfront MI premium of $1,000.00.
Any loan with less than 20% down payment or equity is subject to mortgage insurance. If a buyer can put 5% down he can often get a conventional loan which does not have the upfront MI and has a smaller month MI premium.
The other aspect of an FHA loan is that the borrower usually is allowed a higher debt to income ratio that under conventional financing. In some cases up to 60% of the borrowers income can to go debt service as opposed to about 42% on a conventional loan.
To sum up what is unique here:
*Easier qualifying ratios
*Monthly and one time up front MI
*Harder to do on a condo
*Owner occupied (no second homes)
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers.